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No Federal Preemption in New York Netflix “Throttling” Case

Why it matters: In February 2017, New York Attorney General Eric. T. Schneiderman sued Charter Communications Inc. (Charter) and its subsidiary, Spectrum Management Holdings LLC, formerly Time Warner Cable Inc. (Spectrum-TWC), in New York State court, alleging that these internet service providers (ISPs) committed fraud and deceptive business practices under New York law by, among other things, “throttling” Netflix and other content providers that refused to pay fees to ensure unimpeded internet access to subscribers. Charter thereafter removed the case to federal district court, arguing that the “throttling” claims and other allegations concerning deceptive broadband internet speeds are covered by the federal telecommunications laws and thus preempt state law claims. On April 27, 2017, the district court found no federal preemption and remanded the case back to state court. Although the district court’s decision to remand was reached by strictly applying the federal preemption doctrine, the court made a brief but important reference to recent remarks by the new Federal Communications Commission (FCC) chairman, Ajit Pai, that stringent federal regulation of broadband internet providers such as Charter—specifically via the net neutrality rule adopted by the FCC in 2015—may soon be a thing of the past. The implication is that if the net neutrality rule and other strict federal regulations on ISPs are rolled back, state laws may soon be increasingly relied upon to fill the regulation void.

Detailed discussion: On February 1, 2017, after conducting a lengthy investigation and fielding “thousands” of consumer complaints, New York Attorney General Schneiderman announced that his office had filed a complaint in New York State court against Charter and its subsidiary, Spectrum-TWC. In the complaint, the state of New York alleges that, among other things, Charter and Spectrum-TWC conducted “a deliberate scheme to defraud and mislead New Yorkers by promising internet service that they knew they could not deliver.” The complaint asserts causes of action under New York law for fraud, deceptive business practices, and false advertising.

Further, the complaint alleges that, in addition to “falsely promising” fast and reliable internet speed and connectivity to subscribers, Spectrum-TWC began falsely representing to subscribers in 2012 that “they would get fast, reliable access to content online like Netflix.” The complaint alleges that Spectrum-TWC knew this claim was false because “the company was aware of, and sometimes deliberately created, bottlenecks at interconnection points, which resulted in slowdowns and disruptions to subscribers’ service.” Spectrum-TWC allegedly created these bottlenecks and slowdowns, also known as “throttling,” when Netflix and other “backbone and content” providers refused to pay fees to Spectrum-TWC to ensure unimpeded access to subscribers, resulting in “subscribers getting poorer quality streams during the very hours when they were most likely to access Netflix.”

On February 24, 2017, Charter and Spectrum-TWC removed the case to the Southern District of New York on the grounds that the complaint was preempted by the Federal Communications Act (FCA) and the rules of the FCC. In the removal notice, Charter and Spectrum-TWC argued that removal was appropriate because the complaint identified Charter (a “common carrier” as defined in the FCA) as “the largest broadband internet access service (BIAS) in New York.” Because the “crux” of the complaint is that Spectrum-TWC “misled the FCC and customers about its BIAS speeds,” Charter argued that the “FCC regulates both BIAS speeds and representations thereof.” Further, with respect to the complaint’s “throttling” claims, Charter argued that “the FCC’s open internet rules prohibit ‘throttling’ as an ‘unjust and unreasonable practice’ and provide for oversight of interconnection arrangements with other network operators (such as … content delivery networks).”

On March 13, 2017, the state of New York moved to remand the case back to New York State court, and on April 27, 2017, the district court found no federal preemption and granted the motion, remanding the case back to state court.

The court began its analysis by citing the “well pleaded complaint” rule, which provides that, in questions of federal preemption, a court must look solely to the plaintiff’s state law causes of action and cannot consider the defendant’s federal defenses. One exception to this rule is the “doctrine of ‘complete preemption,’” where a federal statute “wholly displaces” a state law cause of action and provides the exclusive remedy for the plaintiff’s asserted claims. The court continued, “[t]he instant complaint alleges only state law claims, and there is no diversity, so the Defendants’ only argument for why this Court has original jurisdiction is that the Federal Communications Act (‘FCA’) provides the exclusive cause of action for false advertising and consumer protection claims against broadband internet providers such that those claims are properly said to be arising under federal law.” Included in this analysis, the court noted, were the FCC regulations promulgated under the FCA.

To see whether the FCA provides such an exclusive remedy, the court first reviewed at length the FCA’s specific preemption and “savings clause” sections, finding that the federal remedies in the FCA are intended to be in addition to any state or common law remedies unless specifically preempted via notice and comment. Thus, the court held, the “clear text” of these provisions indicates that “Congress did not intend for the federal statute to be the exclusive remedy for redressing false advertising and consumer protection claims against common carriers.” The court reached the same conclusion after reviewing the relevant FCC regulations and pronouncements: “Nothing the FCC has said suggests that the FCA completely preempts state law causes of action against telecommunications services for consumer protection and false advertising claims. In fact, in numerous regulations the FCC has said the opposite.” Because the court found no complete preemption, which it observed would be “needed for this court to have original jurisdiction over this case,” the court ruled that removal was improper and granted the motion to remand.

As a potential harbinger of things to come with respect to the “throttling” claims, the court reviewed the Open Internet Order (the net neutrality rule) adopted by the FCC in 2015 that made ISPs like Charter subject to stricter regulation under Title II of the FCA. The court summarized the history of the “back-and-forth” that resulted in the net neutrality rule to see whether the FCC intended remedies under that rule to be exclusive. As part of this broader discussion, the court noted that the FCC did not categorize broadband ISPs such as Charter and Spectrum-TWC as common carriers subject to Title II regulation until “very recently, and it is quite possible that they will cease being regulated as such in short order.” The court also cited Chairman Pai’s recent remarks on “The Future of Internet Freedom” at the Newseum in Washington, D.C., on April 26, 2017. During those remarks, Pai communicated his views regarding the need for less federal regulation of ISPs—starting with the complete rollback of the net neutrality rule—to bring about a return to the “light-touch regulatory framework” that existed before 2015. If the net neutrality rule and other strict federal regulations on ISPs are rolled back, as Chairman Pai intends, state laws may soon be increasingly relied on to fill the regulation void.